Foot and mouth 'could put up taxes'

By David Litterick and George Jones

12:01AM BST 08 Aug 2001

THE mounting cost of the foot and mouth epidemic could threaten Gordon Brown's ambitious plans to increase spending on health and education and force him to raise taxes, according to a report today from a leading economic institute.

Although this figure is slightly below the Government's own estimates of £3.5 billion, the centre believes the Treasury will see a drop in tax revenue of around £2 billion as the agriculture and tourism industries suffer the consequences of lost exports and fewer visitors to the countryside.

While some of that will be set against the Government's £1 billion contingency reserve fund, the rest will cut a hole in the Government's Budget projections and could even result in a deficit for the year.

In its monthly forecast bulletin, the centre predicts a £1 billion to £2 billion deficit instead of the £4.7 billion surplus forecast previously by the Chancellor for this financial year.

The Chancellor, facing the prospect of a fall in tax revenues at a time when he is having to meet the unexpected bill for foot and mouth, could be forced to scale back his growth estimates when he makes his next financial statement in the autumn.

Douglas McWilliams, CEBR chief executive, said that in previous years such an unplanned increase in expenditure could have been offset by the fact that the Government had been consistently underspending. But public spending was now accelerating and there might yet be a Government overspend.

"On top of this is the loss of tax revenue from the economy growing more slowly that had been expected."

Mr McWilliams believes the epidemic means the Government will run a deficit equivalent to 1.5 per cent of the UK's gross domestic product over the next two years, compared with investment of 1.7 per cent - close to breaking Mr Brown's self imposed "golden rule" that borrowing should not exceed investment.

"At the very minimum this means that further planned increases in public spending in excess of economic growth will be difficult to achieve without tax increases. And if the economy weakens further, even the existing plans might come under pressure," he said.

"It could do significant damage to Mr Brown's credibility which he has spent a long time trying to build up."

Some analysts believe the final bill for foot and mouth may prove to be even greater than that estimated by the CEBR and will shave more than one percentage point off UK growth this year.